OBR Accused of Damaging UK Economy with Productivity Data

The following was published by David Thorpe on the FT’s Adviser blog, and can be found here: https://www.ftadviser.com/investments/2017/11/30/obr-accused-of-damaging-uk-economy-with-productivity-data/

The Office for Budget Responsibility (OBR) and others including the government are wrongly focusing on the UK’s weak productivity growth in a way that is harming the future economic prospects of the country, according to Ann Pettifor, director of Prime Economics.

Ms Pettifor was before the Treasury Select Committee on 29 November giving her reaction to chancellor Philip Hammond’s Budget. She is credited in some quarters with having predicted the 2008 financial crisis.

Ms Pettifor told MPs Brexit will have no particular impact on the UK’s productivity level – but said this is the wrong measure to focus on.

She said productivity is the result of economic activity, rather than the cause of more activity. Her view is that the OBR’s view of productivity data – on which the government relies to inform its spending policies – “inhibits” the government from borrowing more.

She said because the OBR, in its economic forecasts, links current levels of productivity to future levels of economic growth, this makes it look, to the government and other policy makers, as though the future levels of economic activity will be lower.

This dissuades the government from borrowing more now, and instead prompts the government to cut spending in real terms, which reduces future growth levels.

Ms Pettifor’s view is that increased levels of economic growth lead to increased productivity. This is because if more growth is happening in the economy, more of the resources of the economy of the country are being used, which increases productivity.

If the economy is growing, then, in her view, businesses will have more incentive to invest in plant and machinery, and to train staff, all of which adds to productivity.

The Bank of England and the OBR both take the view the UK economy is operating at close to full capacity, meaning the easy productivity gains from a short-term enhancement of public spending levels would be difficult to achieve.

The Bank believes an unemployment rate of 4.3 per cent, which is the current level in the UK, represents the maximum level of employment, meaning investment designed to create extra jobs, and boost productivity would have limited effect.

Ms Pettifor criticised the fact that Philip Hammond, in common with his predecessors George Osborne and Gordon Brown, treats government borrowing to invest in the same way as it treats normal government spending.

That is, it doesn’t assume the investment will yield an economic return. She said the OBR shares this view, with the result that the government act as though there is less room to borrow than is actually the case.

Ms Pettifor said one of the brakes on economic growth, and therefore productivity growth, in recent years is the lack of borrowing in the private sector.

Her view is that when private sector borrowing levels are weak, the government should borrow more to generate the extra growth from the public sector.

Fund manager Neil Woodford, who has been equally scathing of the OBR’s forecasts, though for a different reason, is keen on the prospects for the UK economy.

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